Chapter 02
Professional Standards
True / False Questions
TrueFalse
2. / Auditing Standards issued by the PCAOB are the sole source of guidance for audits of public entities.
TrueFalse
3. / Attestation standards provide guidance for a wide variety of engagements different in scope than an audit.
TrueFalse
4. / Generally accepted auditing standards must be followed on all audit engagements.
TrueFalse
5. / The reporting principle relates to a firm's system of quality control criteria for conducting an audit.
TrueFalse
6. / Auditors cannot effectively satisfy the responsibilities principle requiring due care if they have not also satisfied the performance principle.
TrueFalse
7. / Substantive procedures performed by the audit team are most closely related to the risk of material misstatement.
TrueFalse
8. / Auditing procedures are the same as auditing standards.
TrueFalse
9. / The concept of due care reflects the need to plan and perform the audit with an appropriate level of professional skepticism.
TrueFalse
10. / Under the performance principle, auditors are required to provide absolute assurance that the client's financial statements do not contain material misstatements.
TrueFalse
11. / The performance principle sets forth the quality criteria for conducting an audit.
TrueFalse
12. / Auditors of public entities registered with the Securities and Exchange Commission are required to register with the Public Company Accounting Oversight Board.
TrueFalse
13. / Control risk is the probability that a material misstatement (error or fraud) could occur and not be prevented or detected on a timely basis by the auditors' substantive procedures.
TrueFalse
14. / The word appropriateness refers to the number of transactions or components of an account balance examined by auditors.
TrueFalse
15. / To be considered material, an item must be one that would influence the decision of financial statement users.
TrueFalse
16. / The contents of the auditors' report are guided by the performance principle of GAAS.
TrueFalse
17. / An unqualified opinion indicates that the financial statements present the entity's financial condition, results of operations, and cash flows in conformity with GAAP.
TrueFalse
18. / The auditors' report should either contain an expression of opinion on the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.
TrueFalse
19. / Evidence is considered appropriate when it is both valid and relevant.
TrueFalse
20. / The purpose of a system of quality control is to provide reasonable assurance that the firm and its personnel issue reports that are appropriate under the circumstances.
TrueFalse
Multiple Choice Questions
A. / Provides a conclusion whether the subject matter is presented in conformity with established or stated criteria.
B. / Indicates that the practitioner has significant reservations about the engagement.
C. / Identifies the subject matter or assertion being reported on.
D. / Indicates that the accountant assumes no responsibility to update the report.
22. / Control risk is
A. / The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures.
B. / The probability that a material misstatement could occur and not be detected by auditors' procedures.
C. / The risk that auditors will not be able to complete the audit on a timely basis.
D. / The risk that auditors will not properly control the staff on the audit engagement.
23. / The responsibilities principle under generally accepted auditing standards does not include which of the following?
A. / Competence and capabilities.
B. / Independent attitude.
C. / Due care.
D. / Planning and supervision.
24. / Which of the following types of auditors' reports does not require an explanatory paragraph to support the opinion?
A. / Unqualified opinion.
B. / Adverse opinion.
C. / Qualified opinion.
D. / Disclaimer of opinion.
25. / Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures?
A. / Lending credibility to a client's financial statements.
B. / Using statistical sampling techniques.
C. / Accepting and continuing client relationships and specific engagements.
D. / Obtaining membership in the Center for Public Company Audit Firms.
26. / Which of the following presumptions does not relate to the reliability of audit evidence?
A. / The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements.
B. / The auditors' opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
C. / Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D. / The independent auditors' direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
27. / An important role of the Public Company Accounting Oversight Board is to oversee the
A. / Issuance of statements by the Financial Accounting Standards Board.
B. / Preparation and grading of the Uniform CPA Examination.
C. / Peer review of member firms of the Private Companies Practice Section.
D. / Regulation of firms that audit public entities.
28. / Audit evidence is usually considered sufficient when
A. / It is reliable.
B. / There is enough quantity to afford a reasonable basis for an opinion on financial statements.
C. / It has the qualities of being relevant, objective, and free from unknown bias.
D. / It has been obtained through random selection methods.
29. / Which of the following is not considered a type of audit evidence?
A. / Entity's trial balance.
B. / Auditors' calculations.
C. / Physical observation.
D. / Verbal statements made by client personnel.
30. / (Appendix) The AICPA attestation standards differ from the responsibilities principle, performance principle, and reporting principle in that:
A. / The attestation standards contain no requirement to obtain an understanding of the entity and assess the risk of material misstatement.
B. / The attestation standards do not require competence and capabilities.
C. / The attestation standards do not require planning for attestation engagements or supervision of accountants and consultants who perform the work.
D. / The attestation standards do not require a report that states the character of the engagement.
31. / An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to:
A. / Certify the correctness of Camden's financial statements.
B. / Make a complete examination of Camden's records and verify all of Camden's transactions.
C. / Give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
D. / Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.
32. / Auditors try to achieve independence in appearance in order to:
A. / Maintain public confidence in the profession.
B. / Become independent in fact.
C. / Comply with the responsibilities principle.
D. / Maintain an unbiased mental attitude.
33. / The preparation of an audit plan prior to the beginning of fieldwork is appropriately considered documentation of
A. / Planning.
B. / Supervision.
C. / Information evaluation.
D. / Quality assurance.
34. / Which of the following procedures would provide the most reliable audit evidence?
A. / Inquiries of the client's accounting staff held in private.
B. / Inspection of prenumbered client shipping documents.
C. / Inspection of bank statements obtained directly from the client's financial institution.
D. / Analytical procedures performed by auditors on the client's trial balance.
35. / (Appendix) Which of the following is not an attestation standard?
A. / The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion expressed in the report.
B. / The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement.
C. / The practitioner must adequately plan the work and must properly supervise any assistants.
D. / A sufficient understanding of the client's internal controls shall be obtained to plan the engagement.
36. / Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards?
A. / An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.
B. / The client's chief executive officer graduated from the same university as the partner in charge of the accounting firm.
C. / An auditor on the engagement owns a financial interest in the client's stock.
D. / The client provides financial support to a number of charitable causes that also receive support from the accounting firm.
37. / A vendor's invoice received and held by the client would be considered what type of evidence?
A. / External.
B. / Internal.
C. / External-internal.
D. / Written representation.
38. / Which of the following statements is generally correct about the appropriateness of audit evidence?
A. / Auditors' direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly from independent outside sources.
B. / To be reliable, audit evidence must be either valid or relevant but need not be both.
C. / Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on client financial statements.
D. / Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
39. / The standard auditors' report refers to standards of the PCAOB and GAAP in which paragraph?
A. / Standards of the PCAOB: Scope only; GAAP: Opinion only
B. / Standards of the PCAOB: Introductory only; GAAP: Scope and opinion
C. / Standards of the PCAOB: Introductory and scope; GAAP: Opinion only
D. / Standards of the PCAOB: Introductory only; GAAP: All paragraphs
40. / Which of the following is not included in the auditors' standard report representing an unqualified opinion?
A. / A brief indication of the responsibility of auditors and management for the financial statements.
B. / An indication that all appropriate disclosures have been made and included in the financial statements.
C. / An indication that the audit was conducted in accordance with standards established by the PCAOB.
D. / The auditors' opinion on the fairness of the financial statements.
41. / Internal evidence
A. / Is obtained directly from third parties independent of the client.
B. / Originates outside the client's system but has been received and processed by the client.
C. / Consists of documents that are produced, used, and stored within the client's information system.
D. / Consists of representations made by the client's officers, directors, owners, and employees.
42. / Which of the following presumptions is correct about the reliability of audit evidence?
A. / Information obtained indirectly from outside sources is the most reliable form of audit evidence.
B. / To be reliable, audit evidence should be convincing rather than persuasive.
C. / Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. / An effective system of internal control provides more assurance about the reliability of audit evidence.
43. / The auditors' responsibility to express an opinion on the financial statements is
A. / Implicitly represented in the auditors' standard report.
B. / Explicitly represented in the introductory paragraph of the auditors' standard report.
C. / Explicitly represented in the scope paragraph of the auditors' standard report.
D. / Explicitly represented in the opinion paragraph of the auditors' standard report.
44. / Which of the following is not a concept from the performance principle under generally accepted auditing standards?
A. / The auditor must plan the work and properly supervise any assistants.
B. / The auditor must express an opinion in accordance with the auditor's findings.
C. / The auditor must obtain sufficient appropriate evidence about whether material misstatements exist.
D. / The auditor must determine and apply an appropriate materiality level throughout the audit.
45. / Under generally accepted auditing standards, which of the following relates to the responsibilities principle?
A. / The initial planning of the audit engagement.
B. / The confirmation of accounts receivable.
C. / The completion of an internal control questionnaire.
D. / Maintaining professional skepticism and exercising professional judgment.
46. / Which of the following represent(s) audit quality guides that remain stable over time and are applicable for all audits?
A. / Auditing procedures.
B. / Auditing standards.
C. / Due care.
D. / System of quality control.
47. / Which of the following situations would most likely be in conflict with the responsibilities principle?
A. / Auditors perform the engagement with the performance level expected of prudent auditors but not expert auditors.
B. / Auditors obtain expertise in their client's industry as they are conducting the audit examination.
C. / Auditors are directly involved with a client manager in a strategic decision-making capacity.
D. / Auditors fail to document their assessment of control risk following their study of internal control.
48. / Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high?
A. / Auditors would be required to rely on external (rather than internal) forms of evidence.
B. / Auditors would be required to perform procedures at interim periods rather than at year-end.
C. / Auditors would be required to confirm a larger number of customer accounts receivable balances.
D. / Auditors would be required to obtain more evidence through direct personal observation.
49. / As it relates to audit evidence, appropriateness refers to the
A. / Originality of evidence gathered.
B. / Quality of evidence gathered.
C. / Quantity of evidence gathered.
D. / Timeliness of evidence gathered.
50. / Which of the following information would not be included in the auditors' standard report?
A. / The names of the financial statements audited.
B. / A description of the nature of an audit.
C. / An indication that all necessary disclosures have been presented.
D. / An opinion on the entity's financial statements.
51. / The primary purpose of the auditors' study of internal control for a nonpublic entity is:
A. / To provide constructive suggestions to the client for improving its internal control.
B. / To report on internal control as required by Auditing Standard No. 5.
C. / To identify and detect fraud and irregularities perpetrated by client personnel.
D. / To determine the nature, timing, and extent of substantive procedures.
52. / Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)?
A. / Unqualified opinion or disclaimer of opinion.
B. / Qualified opinion or disclaimer of opinion.
C. / Unqualified opinion or adverse opinion.
D. / Qualified opinion or adverse opinion.
53. / Which of the following statements is true with respect to the persuasiveness of audit evidence?
A. / Persuasiveness is related to the relevance of evidence but not the reliability of evidence.
B. / Evidence is considered more persuasive when gathered prior to year-end than following year-end.
C. / Evidence obtained under environments of stronger internal control is more persuasive than evidence obtained under environments of weaker internal control.
D. / In evaluating persuasiveness, sufficiency of evidence is of more importance than appropriateness of evidence.
54. / Which of the following concepts is least related to the risk of material misstatement?
A. / Control risk.
B. / Detection risk.
C. / Inherent risk.
D. / Materiality.
55. / Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence?
A. / Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities.
B. / Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers.
C. / A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor.
D. / Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
56. / A periodic review of an audit firm's system of quality control by the PCAOB is referred to as a(n):
A. / Inspection.
B. / Peer review.
C. / Principles review.
D. / Quality review.
57. / The performance principle would include all of the following except
A. / The auditors' determination of materiality levels.
B. / The auditors' evaluation of independence with respect to their clients.
C. / The auditors' evaluation of the risk of material misstatement.
D. / The auditors' determination of the nature, timing, and extent of substantive tests.
58. / Which of the following is most closely associated with the responsibilities principle?
A. / Due care.
B. / Planning.
C. / Qualified audit opinion.
D. / Risk of material misstatement.
59. / Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards?
A. / The PCAOB issues auditing standards for the audit of public entities subject to SEC approval.
B. / Standards issued by the Auditing Standards Board after 2003 apply to the audits of both public and private entities.
C. / If not superseded by the PCAOB, Statements on Auditing Standards issued prior to 2003 are applicable to the audit of public entities.
D. / Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both public and private entities.
60. / Which of the following would normally be considered earliest in the audit examination?
A. / Determination of materiality levels to use during the audit.
B. / Consideration of the ability of the entity's internal control to prevent or detect errors.
C. / Preparation of a written audit plan.
D. / Evaluation of the type of audit opinion to be issued based on the auditor's findings.
61. / The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as:
A. / Due care.
B. / Independence in appearance.
C. / Professional judgment.
D. / Professional skepticism.
62. / Which of the following is least related to the concept of independence in appearance?
A. / The auditors' objectivity and ability to act impartially toward the client.
B. / The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements.
C. / The ownership of a financial interest in a client by the auditor.
D. / The employment of the auditor's family member in an important position with the client.
63. / Which concept recognizes that a GAAS audit may fail to detect all material misstatements?
A. / Absolute assurance.
B. / Due care.
C. / Reasonable assurance.
D. / Risk of material misstatement.
64. / Which of the following categories of principles is most closely related to gathering audit evidence?
A. / Performance.
B. / Reasonable assurance.
C. / Reporting.
D. / Responsibilities.
65. / To exercise due care, an accountant should
A. / Take continuing professional education classes.